Course H 111 Verkeerskunde Basis
Basics of Transport Economics
February 2004 (Updated August 2007) Prof. ir. L.H. Immers ir. J.E. Stada
FACULTY OF ENGINEERING DEPARTMENT OF CIVIL ENGINEERING SECTION TRAFFIC AND INFRASTRUCTURE KASTEELPARK ARENBERG 40, B-3001 HEVERLEE, BELGIUM
KATHOLIEKE UNIVERSITEIT LEUVEN
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Preface
This text is part of the subject matter of the course on Basics of Traffic Engineering (H111) taught to the students in the Department of Civil Engineering at the Katholieke Universiteit of Leuven (Belgium). The text is intended to introduce the student to some elementary principles of transport economics and may serve as a stepping stone to more advanced courses. This is a preliminary version of the text. Comments and suggestions for improvement will be gratefully received. Heverlee, February 2004 L.H. Immers J.E. Stada
email: traffic@bwk.kuleuven.ac.be tel: 0032-16-321669 0032-16-321670 address: Katholieke Universiteit Leuven Departement Burgerlijke Bouwkunde Sectie Verkeer en Infrastructuur Kasteelpark Arenberg 40 B-3001 Heverlee (Belgium) Translated from the Dutch by Leni Hurley and Jim Stada (January 2005)
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Contents
1. INTRODUCTION.........................................................................................................................4 2. BASICS OF MICROECONOMICS...........................................................................................6
2.1 E
FFICIENCY AND EQUITY
............................................................................................................6 2.2 D
EMAND FUNCTION
:
MARGINAL BENEFITS
..................................................................................6 2.3 S
UPPLY FUNCTION
:
MARGINAL COSTS
.........................................................................................9 2.4 S
PECIFICATION OF TRANSPORT MARKETS
.................................................................................14 2.5 E
LASTICITY
...............................................................................................................................14 2.6 D
EMAND AND SUPPLY EQUILIBRIUM IN A PERFECTLY COMPETITIVE MARKET
...........................17 2.7 W
ELFARE LOSS CAUSED BY MONOPOLY
....................................................................................20 2.8 W
ELFARE LOSS CAUSED BY EXTERNALITIES
.............................................................................23
3. UTILISING THE INFRASTRUCTURE: OPTIMAL PRICING..........................................25
3.1 M
ARKET EQUILIBRIUM OF ROAD TRAFFIC
.................................................................................26 3.2 T
HE CURRENT MARKET EQUILIBRIUM
.......................................................................................28 3.3 T
HE OPTIMAL MARKET EQUILIBRIUM
........................................................................................29 3.4 E
QUITY ASPECTS OF ROAD PRICING
...........................................................................................30 3.5 M
AGNITUDE OF THE EXTERNAL COSTS IN ROAD TRAFFIC
..........................................................32 3.6 C
ONGESTION CHARGES AND INVESTMENT IN ADDITIONAL INFRASTRUCTURE
...........................33 3.7 F
IRST
-
BEST EN SECOND
-
BEST
....................................................................................................35 3.8 C
ONCLUDING REMARKS
............................................................................................................42
4. CONSTRUCTION OF NEW INFRASTRUCTURE: INVESTMENT ANALYSIS.............43
4.1 S
OCIAL COST
-
BENEFIT ANALYSIS
..............................................................................................43 4.2 S
TEPS IN A SOCIAL COST
-
BENEFIT
-
ANALYSIS
............................................................................44 4.3 D
ISCOUNT RATE AND ANALYSIS PERIOD
...................................................................................46 4.4 B
ENEFITS AND COSTS DUE TO THE DIRECT EFFECTS
..................................................................48 4.5 B
ENEFITS AND COSTS DUE TO THE INDIRECT EFFECTS
...............................................................53 4.6 R
ISK ANALYSIS
.........................................................................................................................54
LIST OF FIGURES..............................................................................................................................56 LIST OF TABLES................................................................................................................................57 REFERENCES.....................................................................................................................................58
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1. Introduction
For the economic and social functioning of society an adequate transport system is necessary. But it must be remembered that the transport sector produces a number of undesirable side effects including environmental problems, noise pollution, traffic accidents and congestion. On the one hand the transport sector offers economic and social advantages, on the other there are cost inducing disadvantages. When assessing the optimal size of the transport system, these advantages and disadvantages must be weighed against each other. To meet the problems associated with increasing mobility, governments intervene with a number of policy measures
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. Examples are the modification of travel demand through spatial planning measures, modifying the modal choice through improved public transport, increasing the efficiency of transport and traffic and stimulating the technological development of vehicle innovation. This chapter examines economically slanted policy measures that are designed to influence the way in which people look at mobility problems. We begin with the assumption that traffic causes social costs (such as congestion- and environmental costs) that are not or insufficiently levied on the user. These harmful effects, of which the consumer, due to the current transport pricing, is not or insufficiently aware, are called negative externalities. Some measures, road pricing for example, aim to internalise these negative externalities. That is to say: these effects become included in the overall price that the transport consumer must take into consideration when deciding whether or not to travel, or which mode of transport to use. As will be explained in this chapter, the social costs of a certain proportion of the traffic on our highways exceed the social benefits. There are a number of ways to remedy this undesirable situation. The most efficient way is by means of correct pricing. As we said above, most governments already intervene by means of a number of policy measures. This is necessary and useful but most current measures still fail to rectify the difference between social costs and social benefits in parts of the transport sector. To rectify this situation, some form of road pricing should be added to all the various forms and sets of measures. It must be born in mind that we need to consider the traffic-induced social costs both when optimising the use of the existing infrastructure and when planning new infrastructure. This chapter therefore also includes a short introduction to the field of social cost-benefit analysis.
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Notes refer to the references section at the end of the document.

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